|Serviced Offices or “Business centers” as they are commonly referred to are an outcome of the modern “All services under one roof” business model. Companies offering serviced offices are generally able to offer more flexible rental terms, as opposed to a conventional leased office which may require furnishing, equipment, and more restrictive leases. Serviced offices can be set up in a day and are therefore becoming increasingly popular as more and more businesses seek globalization. However, there remain several indirect tax related issues that this article seeks to outline.
Classification of service
Though the service is taxable, frequently the
assessee locks horns with the department over
the issue of classification of service; i.e.
whether the service be classified under “Renting of Immovable Property” or “Business
One may wonder does this classification matter
when there is no change in rate of service tax.
Classification is of utmost importance due to
exemptions, stay, etc. granted to various
services. One may be amazed to know that if
the transaction gets classified under renting of
immovable property, it may not be liable to
service tax due to stay granted by Delhi High
Court in case of Home Solutions Retails Ltd.
However, under business support service, as there is no such stay, service tax is leviable @
Moving on to the conceptual difference
between these categories; renting of
immovable property covers plain leasing of
space, whereas business support service
includes providing office space along with other
facilities like‐ office utilities, reception, lounge,
competent personnel to handle messages,
internet, telecom, pantry, secretarial service
and security, etc.
Therefore, since serviced offices provide
services incidental to leasing as discussed
above, “Business support service” seems the
most appropriate category under serve tax
Leasing of office equipments is liable to
VAT or Service Tax
VAT or CST is leviable on sale or purchase of
goods. However, service tax is on rendition of
services. Question arises whether leasing of
office equipments like computers, laptops, etc.
are covered within VAT/CST or Service Tax law.
Since there are no goods sold, this transaction
should not be liable to VAT. However, by virtue
of an amendment in the Constitution of India,
leasing of goods is subject to VAT. Service Tax
may also cover this transaction under “supply
of tangible goods”. However, if such services
are incidental to leasing of premises, it may get
classified under “Business Support Services”.
The main parameter to be looked upon is
whether the effective possession and control of such equipments is passed on to the lessee. If
yes, then the same may be liable to VAT.
However, if the lessor has the effective control
and possession then it should be taxed under
The recovery of other charges like
attending phone calls and visitors,
car parking, conference room for
meetings, video conferencing
facility, internet connections,
printing or photocopying charges, etc. shall be
taxable, under the category of “Business
Support Services” under Service Tax law, as
they are inherent part of consideration of
service provided by the serviced offices.
Further, recovery of charges of consumables
like tea or coffee, eatables, drinks, etc. would
be liable to VAT, provided the charges exceeds
the basic exemption limit of ` 5,00,000 in a
financial year as the charges recovered are towards sale of goods.
If interest charges are recovered, the same may
not be liable for Service Tax as these interest charges are recovered for delay in
payment and the same does not
form part of consideration for
providing service. However, it is possible that
the department officers may take a contrary
view and may try to levy Service Tax on such
Generally the interest free security deposit are refundable and therefore, may not be subject
to Service Tax. However, if a refundable deposit
is forfeited for non payment of rent, such
deposit would take color of rent and therefore,
shall be taxable under Service Tax law.
Recovery of costs
If some expenses like outgoing call
charges or post charges, stationery costs
are recovered on cost to cost basis in
view of contractual terms and other
conditions, service tax may not be
applicable due to pure agent concept.
However, the matter is not free
from doubts and applicability
of tax should be examined in
light of actual facts on a case to
For the new business set ups, these serviced
offices offers great comfort with no capital
expenditure and therefore, this concept is
growing day‐by‐day. The above are few issues
relating to these offices. However, there are
number of issues remaining unsolved. One may
wait for GST to come out with solutions.